8 questions to ask about your 401(k) plan

DustinObhas

The overwhelming majority of retirement plans offered by companies today are 401(k) plans. So for many, a 401(k) is the primary vehicle to save for retirement. Pensions are becoming scarce, and Social Security is only a supplement to your income source after you quit working.

That’s why it’s important to know how your 401(k) works and what options are available to you. Not all plans are created equal, so here are some questions to ask regarding your 401(k) plan:

Does the employer contribute to my 401(k)? This should be one of the first questions to ask. To incentivize employees, some employers offer to match contributions, dollar for dollar, up to a certain percentage of income. For example, Company ABC will contribute up to 3% of your annual pay as long as you contribute the same amount. Needless to say, you should take advantage of free money your employer is giving away. If you don’t think you can contribute because money is tight, at the very least, try to contribute as much as the company is willing to match. Some companies offer what’s known as a safe harbor contribution, which means they contribute a certain percentage of your pay regardless of whether or not you contribute.

What are the fees charged to me, the employee? Setting up a 401(k) has some costs to it, and typically the owners (i.e. plan sponsors) absorb most of the ongoing costs. However, some of the costs are shared by you, the participant. You should know what fees (if any) are coming out of your account besides the expenses from the funds themselves. Ask to see your plan’s Form 5500 for more information on plan fees.

What are my investment options? There are usually a limited number of investment options and they typically come in the form of exchange-traded funds (ETF) and/or mutual funds. You generally cannot invest in individual stocks unless it’s the company stock. Know what your investment options are and the expenses those funds charge (aka expense ratio). Your employer, or the financial adviser working on the plan, should be able to provide you with basic information about the fund. In addition, you can visit sites like MarketWatch, Yahoo Finance and Morningstar to further your due diligence on a particular fund.

Is there a default investment option? If you do not choose a fund to invest in, the 401(k) plan typically has a default fund to put you in. This should not be cash. An appropriate investment is a fund that has a mixture of stocks and bonds in the fund and/or a target-date fund (TDF), which does the asset allocation for you.

Is there a Roth 401(k) election? More plans are starting to implement a Roth option to the 401(k) plan. With Roth, your money is already taxed before it goes into your 401(k), and when you decide to use your funds in retirement, the withdrawals are tax-free. It’s a great option to have, but not for everyone. If you think your tax rate will be higher when you have to access these funds, Roth 401(k) is an option to consider.

Am I subject to vesting? With vesting, if you leave the company before a certain length of time, part or all of the contributions made by the company can be withheld from you. Think of it as an incentive a company provides for staying there for a defined length of time. For example, one common vesting period is a 5-year graded schedule. Meaning, if you are with the company after one year, you can keep 20% of the employer contributions made to you. After two years, 40%, three years, 60%, and so on, until after five years of being in the 401(k) plan you can keep 100% of the company contributions if you quit. Keep in mind that any contributions you make are yours to take with you, regardless of how long you’ve been with the company.

Am I able to rollover a 401(k) balance from a previous employer to this plan? Consolidating your retirement money makes it easier to keep track of your assets. See if your current 401(k) plan allows you to add your 401(k) from your previous employer.

When can I change my deferral amount? Looking to increase your 401(k) contributions? Some 401(k) plans allow this to be done during certain times of the year, such as quarterly or twice a year. Regardless, find out when it can be done so you are prepared when there is an opening to change your contributions.

About the author: Dustin Obhas, CFP® is a financial adviser at CLA Financial Advisors in the greater Chicago area.

Mortgage Rates

Powered by

This advertisement is provided by Bankrate, which compiles rate data from more than 4,800 financial institutions. Bankrate is paid by financial institutions whenever users click on display advertisements or on rate table listings enhanced with features like logos, navigation links, and toll free numbers. Dow Jones receives a share of these revenues when users click on a paid placement.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.